The headlines about the 700 billion dollar bailout plan were displayed dramatically on the front cover of almost every major news outlet in the country only a few weeks ago; history in the making. The largest governmental intervention in the economy since the depression. But soon the pervasive media focus shifted from that to the coming election and poll frauds, and it left many of us scratching our heads wondering what, exactly, they were going to do with all that money and how it would effect us.

The answer to many of those questions remain…unanswered. But my friend Laura Langen from Southland Title put together, in my estimation, the best summary of what was signed into law, what effects it will have in the next few years, and how those effects will ultimately impact the consumers at the end of the chain. You can read that by clicking the link below.

The bottom line is if the Fed can use the cash to free up some of the frozen credit markets, it will start to put some of the wheels of our economy back in motion that have recently come to a grinding halt. Theory and application however, as we have learned time and time again, do not always form a parallel track, and it will be interesting to see what the law of unintended consequences will have to say about it all.

In the 18 years I have sold Real estate, it’s not much of a stretch to say that the last 45 days have been the most unbelievable I have ever seen. It gets to the point that no matter how incredible the news-Wamu and Wachovia gone, Lehman done, AIG, Fannie, Freddie, the market up 600, down 900…we keep waiting for another shoe to drop. I have always considered it my job to report to people what is happening with home prices. Often, I examine areas that affect pricing-loans, interest rates, new construction, population growth, business development etc, so that we can understand and predict what will happen in Real Estate. These days though I must admit, I can feel out of my league. As I study the trends of lower prices, problems with loans, concerns about job security, rising bankruptcies, and certain parts of the market just NOT MOVING, I really wanted to get a “big picture” on what is happening and more importantly what probably will happen. I got my answers last week in Miami. Before I get to that, a quick look at Santa Clarita over the last 60 days. Many of the trends I mentioned in the mid year report have continued:

1. Inventory continues to drop-we are now under 1500 homes for sale. As slow as it is, this is actually not the “oversupply” of 2400 homes from one year ago.

2. The percentage of homes for sale that are foreclosures or “short sales” continues to rise. Over 50% of the homes for sale are in these categories-that is why prices continue to fall.

3. We have basically lost the “move-up” buyer. Santa Clarita is an area in which growth has always been driven by people buying up in size and price. This starts with a first time buyer. Those buyers are actually plentiful in today’s market but they are not buying properties that lead to multiple transactions. Looking for value, the first time buyer is buying a foreclosure or short sale and those sellers ARE NOT BUYING ANOTHER PROPERTY. Few sellers in the $450,000-$700,000 range are selling and buying the $650,000-$950,000 home as the numbers below point out.

4. Because of the lack of “move up” buyer transactions, the $700,000 plus market is slower than I have ever seen it. In our valley today there are about 600 homes in escrow. Of these only 23 are priced over $700,000!! Only THREE are over 1 million!! Even when I sell a property in this range, there are so few “comparables” that appraisal is always a dogfight. So where IS the market?? Under $400,000 we have 376 properties in escrow. From $400,000-$500,000 we have 128. Of those in escrow (and what is in escrow now tells us where the market is now), 82% are short sales and foreclosures.

All of these trends are more pronounced now than when I commented on them 45 days ago, and will likely continue into next year. Why this is happening, when it will subside, and how we differ from other areas are all questions I had for the experts at the REOMAC conference last week in MIami. This is a conference for lenders, servicers, preservation companies and realtors serving the Default industry. In a nutshell it’s a big foreclosure conference, seminar, training and networking oppurtunity. I was there for all those reasons. The keynote speaker was an economist known for being extremely accurate in analyzing and predicting trends affecting the Housing and Financial markets. Dr Christopher Thornberg explained what happened, why it happened, what is happening now and will happen in the next 3-4 years. His position is that we are paying for past sins and to a large extent, no matter who is President, it’s going to be tough for awhile. There was so much covered but here are a few high points:

1.Today’s housing bubble is the worst we have seen in decades. There is approximately 3 million excess properties that need to be absorbed before prices will rise. He predicts that prices will actually hit bottom (depending on the market) from mid 2009 to beginning 2010 but that buyers will be so fearful and cautious that increases in sales and prices won’t really occur until a few years after that.

2. Why this happened is complicated but is a combination of Government policies designed to increase home ownership starting in the late 1990’s combined with the fraud and greed of the 2001-2006 period with the lenders and the buyers of their loans on Wall Street. The Government policies relaxed guidelines for buyers that arguably never should have bought homes but far worse was what followed. In 2000-2002 the stock market crashed. Investors flocked to the strongest return-Real Estate. Buyers soon were greeted with “stated income” loans (“just lie about your income”), zero down loans (“no commitment there”), and “no doc” loans, all designed whether purchasing or refinancing to result in products that the lenders could sell to eager buyers on Wall street. They had fancy names for these new products, and pooled them into securities that today make short sales and loan modifications almost impossible. The high risk factor was ignored because the value of the properties used for these loans kept going up. Consumer spending was at an all time high because home owners just kept refinancing and pulling cash out. Looking back it’s almost hard to believe how little the general public knew or understood about what was really happening-it seems obvious now. The point is that with the crash in values the party ended and the default rates started to soar. For this reason the 700 billion bailout really is not aimed at the Housing market, it’s aimed at the Financial market. According to Chris, the Fed will basically decide in the next few years who gets the money and who survives. Don’t expect that it will do anything meaningful to stem the tide of foreclosures-there are too many of those and too many more (mostly small and medium sized) banks that will go out of business.

3. “Back to affordability”. This means a return to fundamentals in lending. A down payment, good credit and verifiable income is what has always been until recently and will be again to get a loan. Consider how out of whack we got-in 1999 the average price in LA County was 199,000. With 10% down a buyer making $62,000 could buy that property and have 35% of his income go to his house payment. As incomes rose, interest rates fell and housing prices shot up. By the end of 2002, the average home was over $300,000 and represented about 40% of the average income-riskier but not dangerous. This is where prices should have stabilized-a 3year run up in prices is a typical historical market trend and 40% should not be exceeded for affordabilty. Because of low teaser rates and the new loan products mentioned above and fueled by greed and speculation, traditional affordability went out the window and by 2005 the average home in LA County was 577,000 and represented 71% of the average income. Simply stated-THAT DOESN’T WORK.

4. “Stagnant Consumer Spending”. With the lack of credit, elimination of home equity lines and tougher guidelines, growth will stay weak. We will be in the recession that Chris says started in January until 2010. Consumer spending (no more cash to pull out of the house), will be very weak. My friends selling cars and in retail can attest to that. Plenty of belt tightening to be sure.

5. Chris feels the next area to be affected will be Commercial Real Estate-especially retail. Todays cap rates are unsustainable in this economy.

6. State and local Government will face challenges from lower property tax revenues.

7. Unemployment will stay up, the dollar will continue to strenghten, ineterest rates will stay about the same and exports will rise. Too bad few can afford that trip to Europe now!

8. Foreclosures will continue despite an obvious attempt by the lenders to loosen guidelines recently on short sales and a serious effort to work on loan modifications. The problem with loan modifications is that often you cannot change the term because of the way the security was packaged and sold on Wall Street. It has a time limit that cannot be exceeded by simply extending the life of the loan in a loan modification. Worse, is that for most, even with a lower interest rate the client still cannot afford the new payment and has little incentive to try when the value of his home is tens of thousands of dollars below it’s value. Hopefully short sales will become easier so that these properties aren’t abandoned and left to drive values down further.

There was a lot more and obviously I am giving a short version here, but the point is we have a real mess to clean up. Fortunately, a lot of people seem to understand this now and will do their best to do so. As to prices?? Chris says “prices will come down until people can afford homes again”. Seems logical. Today in Santa Clarita, the average home is now in the mid 400’s and probably fairly close to that old guideline of 35% of the average income, which explains why we have 376 homes in escrow under $400,000. If we can reduce the number of foreclosures and replace them with “regular” sellers that want to sell and move up, that is when we’ll see the market resume normalcy.

As we enter the traditionally “slower” part of the year, there is an interesting mix of changes in the market that are important to point out as we try to figure just how long-and how deep-the price declines in our valley will be. No one can predict the future, but there is enough information that I think it’s clear that the worst is behind us -how much lower can we go anyway?. Still, for most of Santa Clarita we aren’t at bottom yet. To jump ahead, I will explain why price softness and decline will likely continue in Santa Clarita for awhile-in some parts of town where the foreclosure rate is higher- as much as 2-4 years is possible. Still, as I have said before, some parts of town (typically older and more established where speculation was minimal and turnover in 2003-2006 was light) we are seeing inventory go down which can lead to stability sooner than later. So, in my constant pursuit of offering good information for you to draw your own conclusions-here is what is definitely happening. I’ll start with the positives:

1. The INVENTORY of homes for sale is down from one year ago by about 30% (2400 homes for sale vs 1731 today). Real Estate is a supply and demand business and inventory going down each month (as 2008 has been thus far) is at the top of the list of things that must happen before prices stabilize.

2. The number of homes in ESCROW is up over last year as well. In Real Estate we talk about (or at least I do), “absorption rates” which is the amount of homes for sale in a given area divided by the amount of homes in that area ‘under contract’. 100 homes for sale, of which 30 are in escrow is a rate of 30%. We have been under 15% for much of the last two years. Today we have 564 homes in escrow and 1731 for sale. Last year it was about 330 homes in escrow and 2400 for sale-today is more than double the absorption rate of a year ago.

3. Because of price declines, AFFORDABILTY is way up. In late 2004, I warned that less than 20% of first time buyers state wide could afford a median priced home. In Santa Clarita where the median price was almost $600,000, the percentage was even lower. That’s a problem. Today, the median price is in the low 400’s and the number that can afford to buy is almost 40% . There is tremendous strength right now under $450,000 where value, better interest rates and easier qualification are making buyers of many. Investors are seeing that with 25% down they can buy and rent out property and cover their payment. That NEVER happened 4 years ago. Last week there were 61 new sales in Santa Clarita. 60 were under $800,000. 50 were under $500,000. WOW! There are many buyers out there waiting for the market to “bottom out”. First time and entry level buyers aren’t among them-they are bidding on foreclosures like crazy. IF this continues stability will come first to this price point…but we aren’t there yet.

So there are 3 tangible, verifiable trends that are encouraging for those that are looking for price stability. I even have sellers saying they want to wait until next year because “the market will be better”. I would love for that to happen but do not think it will. Here’s why:

1. Even though the number of homes for sale is down , the percentage of FORECLOSURES is way up. Of the 1731 homes for sale in Santa Clarita today over 800 are foreclosures or in default (“short sales”). Part of the reason inventory is down is that many “normal” sellers have given up and taken their home off the market-or never tried to start with. So what we have is a market in which every day my “hot sheet” shows the new listings and every day between 40-60% are foreclosures and short sales. Simply stated that is a seller that can AND WILL reduce their price until it sells. There is no “taking it off the market and waiting”. It sells-period. This means further price declines-and possibly big ones-where foreclosure numbers are high.

2. The UPPER END is particularly vulnerable. In Santa Clarita today there are 145 homes for sale over 1 million and 10 in escrow. Taking Agua Dulce out, there are 130 for sale and 9 in escrow. The good news is in the million plus range only 9 of the 130 are in default. Meaning there aren’t a buch of these listings in default which will surely bring prices down more quickly. The bad news is that that is a very low “absorption rate”. Because so few people are selling and moving up (the traditional source of power for Real Estate in our Valley), the upper end is going to be slow unless the home is extremely special with little competition. Remember there are 130 for sale!

3. Financing is still incredibly tough, especially for homes over $700,000. Even though the conforming loan is supposed to be $729,900, in practice ALL lenders have higher rates for loans above $417,000 (the old conforming cut off) and are very demanding in terms of documentation and appraisal. This isn’t going to change until lenders really WANT to loan again, especially to the large percentage of people that are self employed or have income beyond W-2’s. Most lenders tell me we will never see a “stated income” loan again. Good or bad, it’s reducing the amount of sales that could lead to quicker price stability. The anticipated boost to the $600,000-$800,000 price range from the increase in conforming loan amounts clearly has not happened. Basically, every price point over $450,000 has all the signs of a bit more decline and the $600-$900 range has a lot more foreclosures than the 1 million plus range so we’ll have to see what happens.

Beyond this, the final reason I am suggesting that a majority of our valley will see further declines is what is still to come. All of the Asset Managers and those “in the know” at the larger lenders predict a continued flow of foreclosures for the next year. They are being snapped up quickly which is good but they aren’t going away soon, which is bad. This one factor-more than any other-will continue to lead prices down, especially over $450,000 where there is so much less demand. Of course, I hope it is not too much deeper. Until recently, people that bought homes from late 2004 to today represented 90% of the foreclosures. Because of price declines I am now seeing homes bought in late 2003 coming up in default. In short, the foreclosure cycle isn’t close to over. When it finally is, then I’ll start writing again about the “hot markets” we have seen in the past.

A few months back I wrote at length about “Short Sales” versus “Foreclosures” with the basic idea for buyers being “Short Sales” BAD and Foreclosures GOOD. Meaning with foreclosures we knew who the decision maker/seller was, could expect an answer to an offer within a few days, have an escrow of 45 days or less, and generally expect that the condition of the property wouldn’t deteriorate much before closing. None of that can be assumed with “Short Sales”. While “Short Sales” are still an aggravation to be sure, lately foreclosures have become much more troublesome than last year and certainly a far different animal than they were in the 1990’s. All of the following is important for a buyer to understand before making an offer on a foreclosure:

1. The majority of all foreclosures are having multiple offers. Yes, in stark contrast to much of the overall Real Estate market, the foreclosure market is “hot”. Multiple offers is a turn off to many buyers and complicating things is the fact than most lenders will require the property to be available for bids for a certain period of time-usually 5 days. Then expect a counter offer to make your “best and final offer”. The process to actual secure the property can often take more than a week and sometimes more than 2 weeks.

2. Once you have “won” expect there to be delays in just about every step of the process. From opening escrow, getting your offer officially signed off by the lender, getting necessary HOA information, updated preliminary title reports and eventually a signed grant deed by the seller so you can close. I recently closed a deal that was supoosed to be a 30 day escrow. My client gave notice to his landlord (don’t ever do that until advised!), locked his interest rate (ditto), removed his contingencies (fine unless he wanted to cancel due to the seller’s non performance), and because of so many things that have to happen in a timely manner in the escrow process to convey clear title-we closed almost 45 days late. It was highly frustrating for all concerned except the listing agent (who carries about 100 foreclosures in his listing inventory and it’s all he can do to keep up with his email), the Title Company (out of the area because the seller/Bank chooses the escrow and title Companies and is similarly overworked), and the Escrow Company that does the best they can, but lets face it, do they really have to answer to Neal Weichel the way local companies would? No. In short the Seller/Banks are now counter offering for LONGER escrow periods than I am writing in for my buyers offer on a VACANT HOUSE. Yes, it’s ridiculous. Remember, until the seller has actually SIGNED the offer the buyer cannot complete the loan process. Until the seller signs the Grant Deed, you cannot close escrow. Until the preliminary title report and required HOA documents are received and reviewed by you and your lender you cannot have loan documents etc In today’s foreclosure world there is virtually no communication between listing agent and seller-it is all through the internet and email. So the days of picking up the phone and solving the problem (like in the 1990’s) are gone. Bottom Line-expect all of this to happen and be prepared for delays.

3. Properties are sold completely “as-is”. I have seen lenders not even PAY for the Termite, let alone do any work. Often they won’t pay for a home protection plan. Sometimes they do. In the newer construction of much of Santa Clarita this often isn’t a problem but a great inspection-including a thermal scan-is often a good idea. You don’t know-and neither does the seller-what has happened in the past. Be aware

Now after reading all this you may ask-“is it worth it?” Multiple Offer headaches, delays in signing off and processing the paperwork, buying “as-is” etc. As agents, I can tell you they are WAY more work and frustration when you are trying to do a good job for your buyer. But worth it from a value point of view? Just ask all the people that bought them in the 1990’s! In today’s market, for value, they are hard to beat.

It is fascinating to talk to buyers and sellers these days. Unlike 18 months ago, sellers now universally acknowledge “it’s a bad time to sell”. Virtually every prospective seller I speak to me seems to want to share this, sometimes followed by “we should have sold 2 years ago”. Ok, fair enough, though technically our market has been declining since May 2005, now over THREE years ago. The point is most sellers realize homes take much longer to sell, prices are down etc .

Buyers almost universally have their own mantra-“I want a great deal, I am in no hurry, I think the market is still going down” and so on. Again, fair enough, for the most part it’s hard to argue with that. What a lot of buyers and sellers don’t realize though is some of the behind the scene numbers and what they may mean. As I have said before, there is no doubt that because of lots of foreclosures and modest demand there are many, mostly newer areas built in 2004-2006, that still have a way to go price drop-wise. Canyon Gate by Golden Valley, Plum Canyon, Creekside Valencia-I’ve mentioned them before. Then there are areas that don’t have as many foreclosures but for some reason just don’t seem to have much interest, especially over $700,000. Historically popular Newhall is one example. When I think Newhall, I think of a lot of things buyers request. Close to the freeway, good schools, big lots (especially in Happy Valley), big homes (especially in Hidden Valley, Peachland Estates, Customs etc), close to shopping/Town Center etc. Yet, nothing is moving in Newhall. There are over 40 homes for sale over 2500 square feet, 2 in escrow (1 in the last 60 days), and NOTHING in escrow over 800,000. How do you price a home there with nothing selling? Trust me it’s not easy.

So these types of areas represent the areas that are slow moving and arguably still decling in price. Yet, I’ve titled this “A Tale of Two markets” so I am about to explain something that is happening that buyers need to be aware of as they contemplate purchasing. First, because Real Estate is always numbers driven it’s important to note that we have just over 1800 homes for sale in our Valley-compared to 2400 a year ago. For many buyers that I search for there is little for sale in their desired criteria, and what is for sale is often poor-poor condition, location-whatever. Therefore the market is changing-supply of inventory is going down. What isn’t going down though is the percentage of foreclosures and short sales (again often in poor condition) that are out there-they comprise about 40% of the inventory now for sale and almost 80% of what is actually selling. The point is that the Jones’ with the nice home in Valencia or the Smiths with the pool home in Saugus aren’t putting their home up for sale, but WAMU and Countrywide are. When that flow from the banks slows this market will change price wise. And if the Jones’ or Smith’s do put their home up it might very well sell quickly due to lack of real competition. Further, because the foreclosures coming on the market are almost always the lowest priced inventory in their neighborhood, they are selling IMMEDIATELY and with MULTIPLE OFFERS. This is especially true for property priced under $600,000 but it happened last month in Westridge with properties all priced over $800,000 too. I have written offers for clients on foreclosures in which there were 7, 9, 12 and 15 offers on the home in the last month. In all 4 cases the home sold for above the asking price-in one case $40,000 above the asking price. So the bottom line is, if it’s a foreclosure it sells like it’s 2004 unless it’s in an area that is undesirable-and sometimes even then! Thats tough for the sellers I represent as we try to compete against them, but understanding it is happening-and why it is happening-tells us what we can expect for the second half of the year-more of the same.

Almost everyone knows the name “Angelo Mozilo”-he’s the former CEO of Countrywide and he’s been in the news a lot in the last few years, mostly with negative connotations. This morning I had the opportunity to meet and listen to Andrew Gissinger. It’s likely you haven’t heard his name much, but I think you might in the future, and if you do I suspect it will be with good connotations. Andrew (he goes by “Drew”), is the new Executive Managing Director and Chief Operating Officer (COO) at Countrywide, and he actually wants to meet the people out there on the front lines everyday and get their feedback on how Countrywide can improve. What a concept! He struck me as approachable, reasonable, fair, willing to critique his own company and clearly understands the entire loan process, from underwriting to the variety of products available; and he had some interesting thoughts on what is happening and will likely happen in the future. I mention this because I think “no nonsense” people like him will lead us out of the problems that we face in the Real Estate Business and I can only hope that Wells Fargo, Bank of America and the others have similar leadership.

So what did I learn? Lets start with facts and figures. Everyone wants to know when prices will stop falling-here is what the Countrywide people are looking at:

1. Based on data I will share in a minute, they expect prices nation wide to bottom out at the end of 2009. Further, as prices firm and start to rise, they will not hit January 2007 levels until 2013.

2. The reasons for another 18 months of decline break down to a combination of things that are happening:

a. Foreclosures are at the highest level seen since 1981. 1 of 9 sales in California today is a foreclosure. This won’t slow until late 2009.

b. There are about 1.2 million homes for sale in the US that are vacant-this is a huge number of homes that need to be absorbed.

c. There is an 11 month supply of property for sale vs. 4.5 month supply in July 2005.

d. There is still a tremendous problem with availability of financing for buyers. Simply stated, there are no investors to buy loans unless they are solid gold credit, lots of money down etc. Until this changes the market won’t have the demand it needs to get these homes absorbed at a rate that would stop prices from falling further. Also, because of this, FHA loans (where the Government is the “investor”), will dominate the next few years-Drew thinks up to 35% of new loans will be FHA.

3. On the positive side, there are other trends that will ultimately help lead to stability;

a. Building permits for new construction are at their lowest point in decades. Because of immigration, desire to rebuild/rehab existing properties and desire for new homes, this lack of product will firm up the resale market. This is confirmed by my builder friends that all seem to mention 2011 as when they will focus on building in earnest again. Lack of supply=price stability.

b. Past housing declines in California have been driven by unemployment and that isn’t happening now. Unemployment is about 5%-higher than the 3.75% of 2000, but nothing like the over 9% of the early 1990’s. People don’t buy homes if they don’t have jobs, but that isn’t the issue. Buyer confidence and availability of finacing are the issues this time (thats me talking, not Drew but I think he would agree). As liquidity opens up and defaults wane, prices will stabilize. According to Coutrywide-that’s late 2009.

c. Possibly speeding up the process is the unprecedented involvement of our Government-The Fed, Congress and Regulatory agencies. Bottom line-they don’t want foreclosures and further price decline if possible. What they didn’t want to hear 9 months ago, seems to be open to discussion now-anything to keep people in their homes (rate and term modifications, tax breaks for short sales, raising conforming loan amounts, etc) and create quicker stability is on the table.

So thats what is happening-high rates of default and large inventories of foreclosures driving down prices on one side, lack of new building, no real unemployment problem, lower interest rates and possible Government involvement on the other. A few other opinions I found interesting:

The whole idea that loans coming due and owners couldn’t afford the “reset” hasn’t been nearly the reason for foreclosure that people speculated a few years ago-mostly because the reset rate is at or BELOW in many case what it was before the reset. Not in all cases of course, but as I wrote 2 years ago, far more foreclosures have been created by investors and owners walking away from a bad investment than people that truly can’t afford their “new” rate. For those, Countrywide alone has modified over 60,000 loans.

The problem of getting “short sales” approved has improved but is still a disaster for many potential buyers and their agents. There are far more short sale listings than there are foreclosures. Unlike the 1990’s though, lenders like Countrywide have sold these loans to literally hundreds of investors. They are the ultimate decision makers on accepting these and it remains trying. Still, the investors-unlike most of 2007-are starting to be more open to resolving deafults with short sales and the response time has clearly improved in most cases.

There was a lot more shared but these were the high points. It confirmed my feeling that the market today is a lot like 1997-prices are still declining and foreclosures will continue for awhile but there are underlying trends that lead me to think that 1999 (read-stability/appreciation), isn’t that far away-our inventory is down to 1945 homes today from 2500 at the beginning of the year. I’ll keep you informed!

I use this blog as a way to share my insights and opinions with you on a weekly basis regarding the real estate market here in the Santa Clarita Valley. I hope that you find the information useful as you consider the sale or purchase of your home.If I can be of any assistance, please email me, call me, or visit my website.

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I had a conversation today with a past client that wants me to help her find a home this Spring and by the end of the call it was clear to me that there is no topic more important for buyers and sellers in today’s market to thoroughly understand than what a “short pay” listing is compared to a foreclosure listing. First lets start with the basics.

A “short pay” or “short sale” listing is one in which the seller will get no money. They owe more than the home is worth. They want to sell but in order to do so they have to ask their lender-or lenders-to take less than what is owed. As such, they have little concern in most cases at what price the property ultimately sells, because they see no proceeds either way. Enter the Real Estate agent, anxious to make a sale. They suggest to the seller, ‘lets price this well below the others to guarantee you get an offer, which we will then submit to the lender(s), to see if they will approve you for a short sale”. Seems innocent enough, but this is how the problems start.

I call short sales “maybe” listings. I have also called them frustrating, time consuming, impossible to predict and a waste of time. Here is what you need to know:

1. The whole process can take anywhere from 2-9 months to get a final answer from the lender if you make an offer. There are often multiple decision makers involved that will determine;
a. Does the seller even QUALIFY for a short sale? Do they have hardship? True inability to pay? Any possibility to re-finance and keep them in the home? Etc.
b. Does the offer price reflect a fair price for the property? Lenders aren’t stupid. They may be willing to accept an offer that is close to market value but they aren’t going to accept something WAY under it-why would they?
c. Who are the real decision makers and what is their agenda? Back in the 1990’s most short sales were processes that took about 6-8 weeks. In almost all cases the agent dealt directly with a person skilled in evaluating what they call “loss mitigation”. In cases where there was a second trust deed (which was the majority), we dealt directly with a Private Mortgage Insurance Representative. They were motivated to get what
they could to minimize their loss. Because the majority of todays defaulted loans do not involve PMI (the defaulting seller usually got an 80/20 piggyback loan or some type of loan specifically designed to avoid PMI) we now try to communicate and negotiate with 2nd Trust Deed holders that represent pools of investors that bought the Security on Wall Street. Sound complicated? It is. We often don’t know who the real decision
makers are and how to negotiate with them, hence the huge increase in time frames for an answer.

And then the anser is “NO”. “No” we won’t approve the seller, “no” we won’t accept that price, “no” we can’t get the other investors to sign off. And it only took 3, 4, 5, 6 months of hard work to get to that. How many buyers are going to be excited about going through that??

2. Another problem with “Short Sales” is how poor many agents are at handling them, especially with respect to pricing. I mean it isn’t for me to say how they and their client should price it, but when it is obviously so low the bank will never approve the price, something is wrong. I can look at virtually any list of homes for sale in Santa Clarita and tell which ones are short sales solely by the prices. Now 10 years ago this wasn’t too big of a problem because the buyers didn’t even know about them. Today, with the Internet, all buyers see these homes and think they are “normal” listings that they can buy today. They aren’t and they can’t. Agents are not required to disclose to the public that a listing is a short sale-they only have to disclose it to other agents.
As such, agents have gotten creative calling these listings “pre-foreclosures” on realtor.com as an attempt to draw calls from buyers hungry for “deals”. I’m not going to say “short sales” don’t sell-they do. Sometimes they are good deals. But boy are they a headache for the 80% of the time they don’t go through, and in the
process of marketing them the public sure can get confused-and frustrated.

A foreclosure on the other hand is completely different. This is a home owned by a Bank or lending institution. They want to sell it, they have an established price based on an appraisal and can give a buyer an answer in a matter of days-not months. These are fantatstic opportunities for buyers in today’s market as they represent highly motivated sellers with prices that now are almost always are the lowest in tract. Whenever you see “bank owned”, “foreclosure” or “REO” that is a property to investigate. There are dangers-they are always sold “as-is” and often need repairs, but at least there isn’t the painful process of the “short sale” to go through in attempting to buy one. Many times foreclosures are properties that were short sales that didn’t get approved and went to trustee sale. For the patient buyer, sometimes they can then buy it as a foreclosure if the short sale process didn’t pan out.

Unless you have been avoiding the media entirely (which is often not a bad idea), you probably have heard that this week Congress will send to the President for his approval an economic stimulus package. I have no interest in analyzing what this may or may not do except for one aspect-the provisions that will likely lower interest rates for many of my clients. It seems hard to believe that less than a year ago The Fed was worried about inflation and raising the cost of money. In retrospect it seems like it was not the right decision-with higher rates, lenders unwilling to lend for new purchases, rising foreclosures all combining for the worst 6 months in Real Estate (or retail, automotive etc) that many can remember-ever.

This Stimulus Package is an aggressive attempt to stem the negative tide on many levels. Lets focus though on what it can do for you. First, if you have a loan between 417,000 (the current “break even” point for jumbo loans) and 729,950 you will now be able to REFINANCE into a low interest “conforming” loan. Today, for example, you can get a conforming interest rate of under 5.5% with jumbo loans closer to 7%. The goal of course is to help CURRENT homeowners lower the cost of their monthly payment allowing them to stay in their homes (reducing the number of foreclosures) and have extra money each month to spend on consumer items. This is a huge and necessary step but it will only be available for ONE YEAR. If your loan is currently between 417,000 and 729,000 and is over 5.5% then I can direct you to a special 800 number that I have just set up (800-680-8053 xt320) that will update you weekly on rates, changes in lending guidelines and other important facts to take advantage in the next year of this oppurtunity. Secondly, the increase in conforming loan limits is designed to spur home purchases so that buyers can buy more home for less money. This helps areas of higher prices like Santa Clarita where the median price is about $600,000. There is though a big HOWEVER to all of this.

What agents like myself are painfully aware of is how CONSERVATIVE the lenders are now in virtually every aspect of the lending process. First, unless your credit is pristine, it may be difficult to buy or refinance at these new lower rates. Second, because of the soft market, all of LA County is considered declining and as such, the appraisers are asked to basically take current market value and adjust down 5% for the “expected future value”. If you are buying this isn’t too big an issue. If you are trying to refinance however, you may not have the required LTV (loan to value) to refinance-the bank may say you don’t have enough equity to qualify, especially if you are in an area where prices are dropping more than others (See last months blog for those areas). So, if you are starting to get the idea that what should be welcome and easy (refinancing at lower rates because the conforming loan limits went up), may in fact be something the lenders aren’t too excited about-your right.

I was privvy this week to an inter office memo from one such large Mortgage Compnay and it all but said how tough they were going to make the process. As such, I will do everything I can to keep you informed, to help you strategize and ultimately to maximize these important changes to your benefit

Wow, what a difference a few years make! It is at this time of year that I write to you and recap the previous year and lay out what I expect to happen in the New Year. In December 2004 I wrote that 2005 should see a “soft landing in housing prices. At that time, the inventory had risen to over 1400 homes, the demand was slower but steady, financing was available and there were delays in the expected new construction. Myself and virtually all of the top agents I network with-in and out of Santa Clarita-were concerned about the lack of affordability for the first time buyer and felt the 5 year run up in prices surely would now come to an end. As is always the case, more popular parts of Santa Clarita were expected to stay flat or modestly soften, areas where there was more to choose from we expected to decline in the area of perhaps 10%. After appreciation in the area of 200-250% in the previous 5 years, this seemed a reasonable expectation. Well, we all know now that is not exactly what happened.

Against all logic, prices rose about 15% all across Santa Clarita in the first 6 months of 2005, driven by cheap money and speculative greed. A majority of buyers were motivated more by appreciation potential, not necessarily the desire to make their purchase a long term “home”.. As we now deal with the mess that is Real Estate coming into 2008, it is important to note that had prices stayed flat or dropped modestly in the first 6 months of 2005, the fall in 2007 would not have been nearly as painful or dramatic. Unfortunately, for many, 2008 will be more of the same.

Because this is such a “hot topic”, I will try to give as balanced and realistic an explanation as possible. Many people blame the media for creating much of today’s negative Real Estate environment and there is no doubt that is true. I personally know dozens of people ready willing and able to buy-at todays prices-but they won’t until they feel stability and confidence in the marketplace. That is certainly understandable, I would never advise someone to buy anything that will obviously depreciate. However, much of today’s market is not obvious. There is already, in the first 2 weeks of January more calls, showings, and positive feelings from the interest rate cuts among buyers I am speaking to. Also, I believe some neighborhoods will stabilize in 2008, and some never really dropped that much to start with. A few thoughts then before we examine what may happen in 2008-2009.

First, for all the talk of bad loans coming due, anticipated foreclosure rates, builders and lenders in trouble, and other front page stories, never underestimate the importance of buyer confidence and psychology in influencing the market. That fateful 6 months of 2005 was driven by irrational total belief that the market would keep going up! Conversely, in the last 30 months of price decline, by far the last 6 months have been the worst. I don’t think either represents what we will see for the most part in the next 2 years, as we s-l-o-w-l-y see the foreclosure listings get absorbed, and buyers and sellers regain confidence in what everyone admits is a great long term investment. Second, it is hard to argue that cheap, easy loans helped drive prices up. In the last 6 months however, LACK of financing for people that SHOULD be able to get it is causing sales to be slower than they should be, especially for jumbo loans over $417,000. Thankfully, there are signs that this is changing as we enter 2008. With lower rates, lenders able and willing to loan again and increases in FHA loan limits, confidence should start to s-l-o-w-l-y come back. Guidelines and appraisals are tougher for sure, but qualified buyers will find loans in 2008 that were not available in 2007.

Finally, what I am about to share points to a 2008 that will likely be a tough one-prices in most parts of Santa Clarita will continue declining and the number of sales (which is about half what it was in 2004), will be dominated by foreclosures as buyers seek value. For those with a long term view, I expect the next 2 years to offer some of the best buying oppurtunities we have seen in a decade, for those who understand the market. So, since I expect 2008 to be very similar to 2007, lets examine what is happening now and why it is likely to continue.

First, the days of just “any” home selling are long over and price is by far the top reason a home sells in todays market. Only about 8% of homes are actually selling (as of January 16 there are 2245 resale homes for sale with 212 in escrow), and they are homes that are either priced below everything else or priced similar to the competition with better upgrades, yards or location. Why has price become such an overwhelming factor? Lack of confidence. When the first big round of foreclosures hit the market at the beginning of 2007, the banks were not overly aggressive in pricing and were rarely willing to improve the home for sale (paint, carpet, landscape etc.). They simply expected sales-buyers always ask for foreclosures because they think it always means a good deal. By the second half of the year that changed. Almost as if flipping a switch, the foreclosure or “REO” homes started dropping prices signifigantly to move inventory. This caused prices in some neighborhoods to drop 5-10% in a few months as buyers played “wait and see” and lenders tried to find a price that would cause the home to sell. In 17 years of selling homes I have never seen such a large sudden adjustment in prices in so many desirable neighborhoods. I watched homes in newer Saugus that sold for $700,000 in April, sell for $590,000 in November. Condos in Canyon Country that sold for $320,000 in March are listed now at $260,000-and not moving. A popular model in Northpark Valencia that easily sold for $740,000 last Spring just went under contract for $680,000. The biggest drop , both in dollars and percentages occured in the last 5 months.

Will this continue? In some areas, it absolutely will-some parts of Santa Clarita have many homes for sale and few in escrow. When what is for sale is vacant or HAS to be sold (like a foreclosure), prices will fall until a buyer can’t pass it up. As we point to why prices fell so much in the second half of 2007 there is no doubt that the foreclosures and homes in default (short sales), are the main reason why. This will continue until sales increase and the inventory of these foreclosures slows. Most peg this to be late 2008 and into 2009. Next, as “normal” sellers try to compete against foreclosures they are feeling the pain and frustration of an average days on the market SIX times longer than it was in 2004. Sellers in most neighborhoods need to be prepared for it to take months to sell homes not weeks. Yet, to perhaps confuse the issue a bit, it is important to understand that some areas and price points of our Valley are not experiencing nearly the same foreclosure rates and price declines as others. To better understand then what may happen in the next few years pricewise, we can divide our Valley into 3 different types of area.

About 10% of Santa Clarita is actually selling for prices comparable to 2004-2005. Interestingly, this is mostly in the upper price ranges and primarily “in town”-not Tesoro or Sand Canyon. The “Woodlands”, Valencia Summit, Southern Oaks, parts of Circle J and Newhall that offer good locations, yards and upgrades still sell well. Lack of inventory and consistent demand keep prices pretty stable. This has nothing to do with these areas being “better” than others but much more due to examining how these homes sold in the last 4 years, and who bought them. First areas such as these had virtually no speculation-people buy there because they want to live there. Also, rarely did homes sell there with little or money put down. To fully illustrate the point, lets use Northbridge Valencia, a traditionally popular area that would probably not quite be in this group-but parts of it might be. Northbridge prices have probably declined an average of 12% in the past 18 months. In the condos though (Montana, Cheyenne, Rose Arbor) where there were a lot of sales at the height of the market with little or nothing down, the decline has been closer to 25%. In the more expensive Castlerocks, Lexingtons and Sandlewoods where people typically bought for the long term and with more money down the decline has been much less-and will probably continue that way. So even within a neighborhood, how pricing will go in 2008 requires insight and understanding. In Westridge, sales and pricing have been slow and declining for 2 years. Overall, it is definitely not an area I would describe as especially “stable”. However, for that upper end buyer that wants an Oakmont or Custom home with exceptional amenities the price isn’t going to be much lower than it was a year ago-if at all. Across the street though, in Bent Canyon and Montanya, prices dropped 10% in the last 4 months alone due to a higher foreclosure rate, and more speculation. Not too many people “speculated” over one million! Same neighborhood, different supply/demand dynamic, different buyers over the past 4 years, different type of loans, different speculation rate all add up to different price stability. There are buyers waiting for a foreclosure in Oakmont or Presidio (upper end neighborhoods that sell above 1.5 million), and there was exactly ONE in 2007. That isn’t going to drive prices down.

The next area of pricing did not have the stability of above but probably has the greatest oppportunity for value for buyers in the next 2 years. About 60% of our valley is noticeably declining and will likely continue for the next year to some extent. This area declined between 8-20% in the 2007. Again, the price decline had nothing to do with popularity of neighborhood, schools, construction quality or any of the reasons it probably “should”. it is all about abundant supply from speculation that is now in default or a foreclosure. These are some of our valleys most popular neighborhoods but due to a large number of sales in the peak years (2003-2005), pricing that typically saw a lot of activity (500-800,000), and a lot of competition from new construction and foreclosures, prices have been hammered. These are areas like most of Saugus (but not Plum Canyon), most of Valencia, Castaic and parts of Canyon Country. Some parts are closer to 10% and some closer to 20% What will happen in 2008/2009 has everything to do with the inventory now so lets examine it.

First, Northbridge/Northpark, Valencia Copperhill and Stevenson Ranch are in this group but with less expected depreciation. Tesoro and Creekside are in this group but with perhaps more. The reason is, again, due to higher foreclosure rates and WHEN many of the homes were sold. Tesoro/Creekside was dominated by sales in 2003-2005. Northbridge/Northpark had their share in this time but not nearly as many, specualtion rates differed, etc. All of this today adds up to way more homes in default and what I will now address as the single most confusing and frustrating part of any discussion about the market and pricing. That is the “Short Sale” listing.

This is a home listed for sale in which the seller has gone into default. They have no equity and many times no concern really what it sells for. Along comes an agent that needs to get an offer to submit to the bank to see if they will approve the “short”-the difference between what is owed and what the market value is. Some times the bank will allow the short sale and let the owner off the hook-many times they will not and the home will eventually become a foreclosure. The problem with these listings is not that the seller may have to sell it-the problem is what agents are listing them for to attract attention. The list price many times has NO BASIS IN REALITY. It is lower than the bank will ever approve when they appraise it, and creates a false sense in the neighborhoods about what values really are, and to the buyers that think they can buy a home for way less than even the foreclosures are listed for. In short, there is a real problem with these listings in evaluating pricing-they make things appear lower than they really are and there are hundreds of them.

The other factor affecting values in this area is new construction competition. Between June and November, Lennar dropped prices more than 20% in the condo market and 15-20% in their single family home communities in Castaic and Valencia. Pardee was as aggressive in Fair Oaks Ranch. No seller can compete against that without reducing their prices and that is what they did. Between July and November I took 15 homes off the market in CopperHill Saugus, Tesoro, Stevenson Ranch, Castaic and Canyon Country, because prices dropped 10-15% and we could no longer afford to sell. The good news is that Lennar has taken inventory off the market (West Hills), and stabilized pricing on their existing inventory. This will help. Still, with the volume of foreclosures and short sales expected for 2008/2009, this area will continue to decline. When the supply slows, prices will stabilize. In some areas this is already showing the beginning that this is happening. This will definitely occur for all of these neighborhoods, the only debate is when. Complicating this the most is the “short sale” listings -many will become foreclosures, some will not. It is too early to say how much of a decline to expect and of course, some areas will do better than others. A basic rule of thumb though is look at the default rate-the lower it is, the more anticipated stability. These areas then represent great opportunity for buyers-popular neighborhoods, excellent schools, desirable floorplans, price flexibilty and good long term potential. Buyer beware-it won’t last forever!

The third area of Santa clarita is where prices dropped more than 25% in 2007 and foreclosures dominate the market, making stability difficult to foresee soon. Almost always these are areas built in 2003-2006 and where the foreclosure rate is 30% or more of the existing inventory. Simply stated, banks are of the mindset in these areas to drop the price until it sells and who knows where that will be. Some parts of the second group are almost in this area and bear watching. Plum Canyon Saugus for example is in this group-not an especially large geographic area with over 100 properties for sale. Of those, over 50 are short sale or foreclosure. Of the 12 in escrow, 4 are builder sales as the builders compete against the existing homeowners (which is always tough). Of the other 8, SEVEN are foreclosures. Meaning only 1 out of over 100 homes is in escrow with a “normal” seller. This area will probably take awhile to stabilize, as you can imagine. Similarly, Canyon Gate by Golden Valley High School has newer homes that aren’t moving. Of the 12 for sale in that tract, 9 are short sales or foreclosures and worse there hasn’t been a sale in months. Who knows where the market really is for those? Also, many condo developments across Santa Clarita bear watching-many of the buyers for these in 2004/2005 put very little down and default rates in condos is typically noticeably higher than in surrounding single family homes. Some condos, not all. Again, you have to know what you are looking at

….As you can tell then, the market for the next 2 years will be decidedly different from neighborhood to neighborhood and literally tract to tract. For sellers considering selling and buying up, there is every reason in the world to do exactly that. For people thinking about selling in areas with a lot of supply, you may want to wait a few years. And with prices and rates dropping, I have already spoken to more first time buyers in the past month than I did all last year, which is a VERY encouraging sign. If it is one thing I have learned in selling homes for 17 years, Real Estate is all about cycles, and I’ve seen them all. Understanding them and making good decisions-that takes patience and effort. I am committed to both in 2008. Happy New Year!

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